Buyers And Sellers Can Profit From Residential Lease-option

July 10, 1988|By Robert Bruss.

Do you want to buy a home but lack the cash for a down payment? Or are you a seller whose home hasn`t sold? If you have either of these problems, the lease with option to purchase can profitably solve your dilemma.

A lease-option gives the tenant the right to immediate use of the property and the right to later acquire title to the property. The legal owner continues to receive all the income tax benefits including deduction of expenses such as mortgage interest, property taxes and depreciation.

The big lease-option advantage for the tenant is being able to control the property with very little cash. Usually only the first month`s rent plus a nonrefundable ``consideration for the option`` is required.

The option money on a residential lease-option is usually a few thousand dollars which is credited toward the down payment if and when the option is exercised.

The length of the lease-option can be whatever the landlord and tenant agree upon. Residential lease-options are usually for one or two years. From the tenant`s viewpoint, the longer the lease-option the better because the option purchase price is usually locked-in at the time the agreement is signed.

My best home lease-option is for a 15-year term with fixed rent and option price, although I am obligated to pay increasing property taxes and maintenance costs.

Four years ago I bought this lease-option by paying the real estate agent`s $3,000 fee, $6,000 advance rent to the owner, and $1 option consideration. The home`s option price was its $125,000 market value. Today it`s worth more than $200,000.

Although I won`t get the tax deductions until I exercise the purchase option, I benefit as the home`s market value rises and my $125,000 option price remains unchanged. I don`t exercise the option because I would have to tie up cash and I have a nice positive cash flow after paying the rent and expenses.

To illustrate how to acquire a lease-option, suppose a home is worth $100,000 but you don`t have a down payment to buy it. Instead, you might offer to lease it for $1,000 a month with an option to buy at $100,000 any time within a year.

This offer might look attractive to the owner if he has been unable to find a buyer. Or perhaps the owner has been trying to rent the house and has found it difficult to obtain a reliable tenant.

The lease-option can solve problems for the owner and the tenant. If you are the tenant and are an especially shrewd negotiator, you might offer to raise the rent to $1,200 a month if the owner will give you a rent credit toward the down payment. Such an offer will appeal to an owner who needs cash. Unless you live in an area where home sales are very slow, finding a lease-option is not easy. The best lease-options are not advertised, they are created.

To find desirable lease-option property, use all the standard bargain-finding techniques. Work with local real estate agents, read the newspaper classified ads, tell everyone you meet that you want to lease-option a home, and think creatively.

In addition to reading the ``houses for sale`` ads, check the ``houses for rent`` want ad column since it is usually the best source.

Your strategy should be to look at the property and, if you like it, make your lease-option offer to the owner. But be aware if the property has just come on the market for sale; your chances of lease-optioning that home are slim.

The best lease-option candidate properties (1) need fix-up work, (2) have been on the market several months, (3) are vacant and (4) are offered by a motivated owner who needs cash. Out-of-town absentee landlords are an especially good source of lease-options.

If you are a property owner with an unsold property, guaranteed action will result if you run a newspaper ad such as ``Lease with option to buy. $5,000 moves you in.`` Get ready for the phone to ring.

After you verbally agree on the lease-option terms, to avoid misunderstandings be sure to put everything in writing. Either use a printed lease-option form or consult a real estate attorney. If you are the optionee- tenant and will not be living in the property, I recommend recording a memorandum of the option just in case the optionor-landlord tries to sell the property to someone else.

For added protection, obtain a title insurance policy on your option to be sure the landlord owns marketable title.

However, if you are the property owner you will probably resist allowing the tenant to record the option or a memorandum of it because that will cloud your title. Just point out if the tenant is living in the home, he is well protected since anyone dealing with the property does so subject to the tenant`s rights.

Lease-options are the ideal way to control property with little cash. Home buyers who lack an adequate down payment can tie up a house at today`s market value while saving for a down payment to exercise the purchase option. A rent credit toward the down payment further speeds the down payment accumulation process.

But there are also lease-option advantages for property owners such as being able to dispose of hard-to-sell property and get immediate cash flow from it while retaining the tax benefits.